China's Ride-Hailing Sector Price Wars
Cheng Wei founded Beijing-based company DiDi Chuxing in 2012 for one purpose: providing a more convenient method of hailing cabs. This simple concept has transformed a cumbersome task of physically hailing down a cab and shifted it to a digital platform that has metamorphosed into a multi-billion-dollar enterprise. It has ushered in a new era of ride-hailing that would accompany a mutual growth in technology unlike the world has never seen.
On the other hand, San Francisco-based company Uber was created by founders Travis Kalanick and Garrett Camp in 2009 to alleviate the high price of private driving services in California. Since then Uber has evolved into a multifaceted conglomerate company that has used its highly loyal consumer base in United States to expand its services into research for AI and self-driving cars to try to establish a foothold as potential leader of these fierce ride-hailing wars.
With population growth on the rise in developing countries across the world, two-thirds of the world is expected to live in cities by 2050.[www.theguardian.com] Growth of ride-sharing and resulting ride-sharing wars between companies is inevitable. This places these huge start-up companies such as DiDi Chuxing and Uber at the forefront of the ride-hailing sector price wars to not only obtain as much of the customer base as possible, but to retain customer loyalty among aggressive competition from other companies that are tempted to cut a piece of the proverbial “ride-hailing pie profits” in upcoming mega-metropolis areas.
So, while Uber boasts an impressive 40 million customers a month, Didi boasts a reported 38.5 million riders and more funding as of 2017.[www.statista.com] As these two giants were simultaneously becoming rising powers in the East and in the West, competition was an inevitable result. This level of competition forced both Uber and Didi to lower rates to stay in competition with each other, which resulted in Uber reporting a deficit of $3.2 billion dollars in 2017 alone.[www.forbes.com] And even though Uber was shunned out of China in 2016, Didi Chuxing saw a loss of around 300 million dollars in 2017 due to new competition.[www.kr-asia.com]
Competition was expected by Uber since it was voyaging into a foreign territory where a type of business model – the network effect – was applied into a market that already had an established leader in ride-sharing, Didi Chuxing. An all-out ride-hailing price war between DiDi and Uber broke out in China in 2016 as a result, where Didi subsequently acquired Uber’s China operations.[www.cpianalysis.org]
So as ride-hailing companies expanded into new unregulated markets, high variable costs and intense price competition between companies and the pre-existing taxi infrastructure caused a shift in mentality for the average consumer and employee – away from brands and loyalty – and to the cheapest possible ride. Even drivers have no loyalty to the company if someone else pays more. Some private drivers even work for multiple ride-sharing companies to directly compare rates and maximize their own profits.
Throughout this price war between the two giants in the scene, Didi has molded its strategy to not only compete directly with prices that Uber has to offer, but to also apply a four-pronged strategy when expanding into new areas so they may succeed unlike Uber, who failed to merge into the Chinese market. The strategy of "… organic growth, acquisitions, partnerships with domestic players and continuing to raise lots of cash” has given the Beijing-based company a foothold in a lot of emerging economies for ride-sharing development. This main strategy differentiates Didi’s expansion into new territories from Uber’s, where Uber essentially “invades and conquers” foreign markets rather than growing organically.
This strategy by Didi is seen in recent partnerships and business deals Didi has been establishing across the globe. Didi has invested in “Lyft in North America, Ola in India, Grab in south-east Asia, Careem in the Middle East and north Africa, and Taxify in eastern Europe” to create a monopoly and growth while maintaining customer loyalty in these areas.[www.ft.com]
In addition to this already raging war, Tencent-backed Meituan-Dianping has put its foot in the doorway and adds another major player into this price war. Alibaba’s AutoNavi has recently released a ride-hailing service in mainland China as well. Both companies are expected to face fierce competition with Didi Chuxing at the throne of these potential threats, but with more competition and history dictating outcomes in ride-hailing wars… The question shifts to not who will be the victor of the war, but who will take the spoils?